Rising oil cost won't derail economy
By Xie Ye (China Daily)
Updated: 2004-05-11 08:40

Although China's major oil firms are likely to garner windfalls from surging crude oil price, currently hovering around a 13-year high, this will increase the costs to oil consumers such as airlines.

But experts say that the overall impact of the price hike on the national economy will be limited.

Bench market crude oil futures touched US$40 a barrel last week - the highest finish since the 1991 Gulf War - amid concerns over Middle East security and tightened US supplies. The price eased yesterday with growing expectations that the Organization of Petroleum Exporting Countries (OPEC) will soon increase supplies in order to offset surging prices.

Experts said the oil price rise backs strong performances by the three largest domestic oil majors including PetroChina, Sinopec and CNOOC Ltd.

The profits of the three companies are expected to rise by an average of 7-8 per cent on every dollar per barrel rise in the crude oil price, they said.

If the strong momentum maintains, the full-year profits of the companies are likely to rise by 20-30 per cent.

"A high oil price sustains the exploration and production business," said Li Zhipeng, an oil analyst at Xiangcai Securities Co Ltd.

"While the refinery major keeps flat, the strong crude oil also helps push the prices of petrochemical products higher."

Petrochemical product prices increased by up to 30 per cent since last year. And this performance will continue throughout this year with high oil prices and recovering demand, said Li.

Chinese oil companies have already benefited from the price rise last year, with an average year-on-year profit rise of 37.4 per cent. The oil giants' profits account for one quarter of China's industrial profits.

The crude oil price surge, however, might be a nightmare for airlines and raw material users due to increased fuel costs and freight charges.

Although the government allows airlines to peg a premium on flight charges, it does not always cover the increase in fuel costs, experts said.

And the high prices almost doubled international freight rates for dry cargo, which, along with increased demands, has increased raw material prices such as iron ore, alumina and fertilizer.

For instance, the CIF (cost, insurance and freight) price for Russian kalium fertilizer to China has increased by nearly 40 per cent from last January to the current price of US$165 per ton.

But experts said that impact of rising oil prices on the nation's economy won't be harder than that on developed economies, because of "China's relatively low dependence on crude oil and the low inflationary pressure." Oil consumption constitutes only 20 per cent of the nation's total energy mix, as compared with 55 per cent in Japan and 40 per cent in the United States.

And the government would not raise the domestic retail prices for oil products such as diesel and gasoline immediately to reflect the international price rise, experts said.

China pegged its domestic refined oil products to average rates in Rotter Dam, New York and Singapore. Sinopec and PetroChina, the only two authorized oil companies to wholesale gasoline and diesel, are allowed to raise or drop their retail price by 8 per cent from the government-set benchmark.

The National Development Reform Commission has raised benchmark gasoline rates by 300 yuan (US$36.3) a ton, or 8 per cent, in March, but kept prices of diesel unchanged.

"The government wants the price to be stable," said Shan Hongqing, an expert with the Economic and Development Research Institute of Sinopec. "Either a high or low price will hurt the national economy."

Shan also said the claim that the strong oil demand from China has fanned the global oil price rise is overexaggerated.

Earlier this year, the Paris-based International Energy Agency said China's breakneck economic growth, fuelling record oil imports, boosts this year's surge in world crude prices.

World prices hit by fears of possible attacks

SINGAPORE: World oil prices slipped yesterday but stayed close to 13-year peaks as Iraqi crude exports were reduced by sabotage to a pipeline and Kuwait tightened security at ports after warnings of possible attacks.

Weekend comments by some OPEC producers over a possible rise in official supply limits also helped dampen some of the bullish sentiment that last week saw oil prices hit the highest levels in 13 years.

US light crude eased 14 cents to US$39.79 a barrel, just 21 cents off the US$40 struck on Friday for the first time since October 1990, in the run up to the first Gulf War.

London's Brent crude slid two cents to US$36.98 a barrel.

Fears of disruptions to oil supplies from the Middle East, which pumps about one-third of global production, increased yesterday when official sources in Iraq said oil exports from the south of the country were disrupted after sabotage to a major pipeline feeding the Basra oil terminal.

Most of Iraq's 1.8 million barrels per day (bpd) of exports pass through the Basra terminal, which was the target of a foiled coordinated sea-borne suicide bombing attempt two weeks ago.

The US Army Corps of Engineers said southern crude exports were halted and a pipeline was still ablaze after the sabotage attack on Saturday.

Iraqi oil officials said exports were continuing but at a reduced rate of about 1.2 million bpd following the attack but they expected to return to normal at 1.6 million bpd by Wednesday.

Traders had feared an attack on oil infrastructure in the Middle East after the attempted bombing of the Basra oil terminal in late April and the shooting of foreign workers at a petrochemicals plant in Saudi Arabia a week later.

"There's probably a US$5 premium in the oil price at the moment because of worries of a terror strike," said David Thurtell, commodities strategist at Commonwealth Bank of Australia in Sydney.

Kuwait has beefed up security at six ports after US warnings to oil-rich Gulf states of possible sea-borne attacks by booby-trapped boats or jet-skis, an official at Kuwait's General Administration of Customs said on the weekend.

Thurtell said OPEC ministers had begun "softening the market up" for a reversal of the group's April production cut, which reduced the cartel's official production ceiling by one million bpd to 23.5 million bpd.

"If the damage (to Iraq pipeline) is bad and likely to last for weeks, OPEC will need to respond quickly by cranking up production, " said Thurtell.

The Organisation of the Petroleum Exporting Countries is due to review output policy in Beirut on June 3.

The United Arab Emirates said on Saturday that OPEC should raise production to cool oil prices and that the group was already taking action by pumping about two million bpd above official quotas.

Iran, the cartel's second-biggest exporter, said it would not oppose OPEC raising output limits by perhaps one million bpd at the June meeting.

OPEC decided to curb supplies in the second quarter to avoid any glut and price crash as winter demand traditionally ebbs but low gasoline supplies in the United States, strong Chinese demand and Middle East security fears have driven prices up to the highest levels in more than a decade.

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